LOS a: Explain why an analyst would use a ten-year moving average as a benchmark in the valuation process.

Q1. During a CFA analyst meeting, Mark Zastrocci mentions that a moving average over at least 15 years must be used as a historic benchmark if meaningful results are to be obtained when conducting equity valuation. Is Zastrocci correct?

A)   Yes, because the CFA performance presentation standards require that a 15-year moving average is used when valuation is reported.

B)   No, a 10-year moving average is an acceptable historic benchmark for valuation purposes.

C)   No, because the CFA performance presentation standards prohibit the use of moving averages.

Q2. During a CFA society-sponsored dinner meeting, Erica Hill comments to a colleague that a 10-year moving average is an appropriate benchmark to use in the equity valuation process. Is Hill correct?

A)   No, because the CFA performance presentation standards prohibit the use of moving averages.

B)   Yes, a 10-year moving average is an acceptable historic benchmark.

C)   Yes, because the CFA performance presentation standards require the use of a 10-year moving average when reporting valuation results.

Q3. During a CFA conference breakout session, Lan Lee mentions that a 10-year moving average is an appropriate benchmark regardless of whether a firm has experienced a recent downgrade in its growth prospects. Is Lee correct?

A)   No, a firm with a recent downgrade in its growth prospects may appear to be cheap relative to its value when its growth prospects were more favorable.

B)   No, a firm with a recent downgrade in its growth prospects may appear to be expensive relative to its value when its growth prospects were more favorable.

C)   Yes, the use of a moving average assures that relative valuation metrics are accurate regardless of recent growth downgrades.

LOS a: Explain why an analyst would use a ten-year moving average as a benchmark in the valuation process. fficeffice" />

Q1. During a CFA analyst meeting, Mark Zastrocci mentions that a moving average over at least 15 years must be used as a historic benchmark if meaningful results are to be obtained when conducting equity valuation. Is Zastrocci correct?

A)   Yes, because the CFA performance presentation standards require that a 15-year moving average is used when valuation is reported.

B)   No, a 10-year moving average is an acceptable historic benchmark for valuation purposes.

C)   No, because the CFA performance presentation standards prohibit the use of moving averages.

Correct answer is B)

While a 15-year moving average may be appropriate, it is by no means the minimum acceptable length for a benchmark average. A 10-year moving average is also an appropriate and suitable historic benchmark for measuring relative value.

Q2. During a CFA society-sponsored dinner meeting, Erica Hill comments to a colleague that a 10-year moving average is an appropriate benchmark to use in the equity valuation process. Is Hill correct?

A)   No, because the CFA performance presentation standards prohibit the use of moving averages.

B)   Yes, a 10-year moving average is an acceptable historic benchmark.

C)   Yes, because the CFA performance presentation standards require the use of a 10-year moving average when reporting valuation results.

Correct answer is B)

A 10-year moving average is a common and appropriate historic benchmark for measuring relative value

Q3. During a CFA conference breakout session, Lan Lee mentions that a 10-year moving average is an appropriate benchmark regardless of whether a firm has experienced a recent downgrade in its growth prospects. Is Lee correct?

A)   No, a firm with a recent downgrade in its growth prospects may appear to be cheap relative to its value when its growth prospects were more favorable.

B)   No, a firm with a recent downgrade in its growth prospects may appear to be expensive relative to its value when its growth prospects were more favorable.

C)   Yes, the use of a moving average assures that relative valuation metrics are accurate regardless of recent growth downgrades.

Correct answer is A)

An analyst must be careful when a moving average is used as a historic benchmark for valuation purposes when the firm being valued has experienced a recent downgrade in its growth prospects. When this occurs, a stock may appear to be cheap relative to its value when its growth prospects were higher